Limiting Limits

Uncle Sam is trying to prune the Mississippi Christmas tree again, that nefarious legal structure farmers once used to harvest extra farm payments. The 1989 Farm Bill trimmed that tree down to the three-entity rule that, in effect, allows farmers to receive twice the payment limit.

Now the government has whacked the tree down to bush size with the 2008 Farm Bill that eliminates the three-entity rule and limits direct payments to $40,000.

“The 2008 Farm Bill repealed the three-entity rule and replaced it with what we're calling the ‘attribution’ rule,” says Todd Jennison, Farm Program Services, with Kennedy & Coe, an accounting and consulting firm in Salina, KS.

“You can still have as many entities as you want, but the government wants to know which warm bodies are involved and will track payments to a social security number. When direct payments reach the $40,000 limit, you're not eligible to receive any additional funds through that program.”

IF YOU'RE FARMING 1,500-2,000 acres or more and have been collecting a double limit by complying with the three-entity rule, your operation is likely to be affected by the new law, according to Terry Jones, a Willamsburg, IA, farmer and partner in Russell Consulting Group, Panora, IA. “It will depend some on how you're set up as a C corporation, LLC or other legal entity. I'm the only person in my C corp so all payments already flow through directly to me,” he says.

“Farmers who set up an LLC for the machinery part of their operation, for example, may have to change their structure or change the ownership in their entity to receive as many payments as they did under the three-entity rule,” Jones says.

So, do farmers need to grow a new type of payment limitation tree? That's likely, says Jennison. The problem is no one knows what that tree needs to look like yet. “I can tell you what the law says, but I can't tell you how the FSA will interpret and regulate it. We expect a ruling sometime between October and February,” he says. “It's getting frustrating. There's all kinds of confusion out there. Traditionally you've had to have any changes in place in your operation by April 1, if the changes increase your payment eligibility. Farmers like to have changes in place by Jan. 1 because it makes property evaluation simpler.”

THAT DEADLINE WILL be tough to make. “It's our understanding that right now (mid-September) FSA doesn't have the regulations, software or procedures to administer the new farm program,” says Jennsion.

Regardless of the final rulings, it's worth the time to comply, according to Jones. “Some guys might look at it and, with today's prices, think it's not worth the $35/acre or so they receive through the direct-payment program. But, if their neighbor does take the time to make it work, that gives him $35 you don't have to bid into the cash rent market,” he says. Because each payment will now be tracked to an individual, you're going to need more people involved if you want to maintain the same level of payment you received under the three-entity rule. But that's tricky, points out Jones. “If you just add more people, you're diluting your operation,” he says.

LIBERALIZED RULES ON spouse eligibility may provide help to some farmers, according to Jennison. The government eliminated a number of hoops couples used to have to jump through. Under the new law, if one spouse is actively involved in the farm operation, the spouse automatically meets the eligibility requirements, according to Jennison.

An alternative way to add people to your operation is to bring in outside investors, according to Jones. “Capital is becoming a bigger and bigger issue in farming. If you bring in outside investors, it gives you access to more capital and you can recoup the lost government payments by charging investors a management fee,” he says.

Your final options won't be known until FSA makes its ruling. In the meantime, Jennsion suggests, “Stay tuned.”